Comfortdelgro Corporation Ltd is Near its 52-Week Low: Is it an Opportunity?

Comfortdelgro Corporation Ltd (SGX: C52), or CDG, is one of the world’s largest land transport companies with operations in seven countries. Its businesses include bus and rail services under SBS Transit Ltd (SGX: S61), car rental and leasing, automotive engineering services, inspection and testing services under Vicom Limited (SGX: V01), driving centre, insurance broking services and outdoor advertising.

As of the time of writing, CDG’s shares are going at S$2.01 apiece. The price has fallen some 18% since the start of the year. In comparison, the Singapore market, as represented by the Straits Times Index (SGX: ^STI), has moved in the opposite direction.

Is there an opportunity to profit from the land transport giant’s precipitous fall in share price? There’s no easy answer to this but we can use a checklist presented by a well-known investor, Peter Lynch in his book, One Up On Wall Street, to get a clearer picture.

1) Is the Price-to-Earnings (P/E) ratio low or high for this particular company and for similar companies in the same industry?

Currently, CDG is valued at 14 times its trailing earnings. The closest listed peer was SMRT Corporation Ltd but it has since been delisted.

Without a similar company in the same industry, we can compare CDG’s valuation to the valuation of the STI. However, since the P/E ratio of the STI is not easy to obtain, we can use the valuation of the STI ETF (SGX: ES3), an exchange-traded fund which can be taken as a proxy for the market. The STI ETF is valued at a trailing P/E ratio of around 11 now.

It can be seen that CDG is valued at a premium as compared to the Singapore market.

2) What is the percentage of institutional ownership? The lower the better.

Companies that are not picked up by the ‘radar’ of institutional investors (big money managers) tend to offer better value as they would be less well-known in the market.

As of 6 March 2017, BlackRock, Inc. together with The PNC Financial Services Group, Inc. had a 6.01% stake in CDG. They are the only institutional investors that are classified as substantial shareholders of the company.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs.

The last time an insider of the company bought shares was in April 2016. Mr Kua Hong Pak holds 0.18% of the company. He stepped down as a Group Chief Executive Officer on 30 April 2017.

The company has not bought back any shares.

4) What is the record of earnings growth and are the earnings sporadic or consistent?

The chart below shows CDG’s net profit trend from FY2003 to FY2016.

Source: Comfortdelgro Annual Report 2016

The firm’s net earnings have grown consistently, except for the drop from FY2006 to FY2008. The annualised growth rate from FY2003 to FY2016 is 6.9%.

In FY2016, CDG had a net profit of S$317.1 million, a rise of 5% year-on-year.

5) Does the company have a strong balance sheet?

The debt-to-equity ratio was 0.62, as of 30 June 2017. This shows that the land transport outfit is not heavily leveraged.

6) The cash position

As of 30 June 2017, the firm had a total debt of S$377.1 million and a cash balance of S$606.6 million. This translates to a strong net cash position of around S$230 million.

The Foolish bottom line

In a final tally of the scores, Comfortdelgro has done well on four fronts: 1) It has low institutional ownership; 2) it has shown consistent growth in earnings; 3) it is not highly leveraged; and 4) it has a strong cash position.

However, we have not looked into the future growth prospects of the company. The firm is seeing strong competition for its taxi business from disruptors, Grab and Uber. The potential tie-up with the latter may help to mitigate some of the risks, but nothing is concrete thus far. This is something potential investors should look into before putting their hard-earned money into the land transport giant.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P owns shares of Vicom Limited and units of STI ETF.